Commentary: Fear sends equity and commodity prices tumbling in 2018

LONDON (Reuters) - Fear became the dominant sentiment in 2018, especially in the second half of the year, as growing pessimism about the future gripped policymakers, business leaders, investors and journalists.

Workers are seen next to aluminium rolls at a plant in Binzhou, Shandong province, China September 13, 2018. REUTERS/Stringer

Those best able to articulate, amplify and exploit concerns about the economy, migration, security and the impact of technology proved the most influential.

Fear can be a powerful motivating force but it is not a particularly creative one. “Fear is the mind-killer, fear is the little-death that brings total obliteration,” Frank Herbert wrote in his 1965 novel “Dune”.

Risk-taking and willingness to invest under conditions of uncertainty are critical to sustaining output, growing the economy and raising real incomes.

“If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation,” John Maynard Keynes wrote in 1936’s “General Theory of Employment, Interest and Money”.

As fear drives the global economy towards a slowdown or outright recession, politicians, business leaders, investors, journalists and voters will have to find reasons to become more optimistic if the threatened slump is to be averted, or at least not prolonged.

CHINA RISING

The rising influence of China and its shifting balance of power with the United States was one particular area of concern in 2018.

By the end of the year, the two countries were embroiled in a wide-ranging conflict covering trade, intellectual property, foreign investment, technology transfer and espionage, as well as an accelerating arms race.

Strategic competition intensified globally, from the Pacific and Indian Oceans to Africa, Latin America, Central Asia and Europe, as well as in multilateral institutions including the IMF, World Bank, APEC and WTO.

The two superpowers appeared to be heading towards a new cold war in which the globalised economy of the 1990s and 2000s would be sundered into separate and competing economic, diplomatic and military blocs.

A proliferation of tariffs and non-tariff barriers intended to protect national and economic security was born from worries about the impact of international trade on domestic manufacturing industries and employment.

Policymakers as well as academics stipulated that trade should be fair as well as free, with optimism about the benefits of globalisation countered by renewed calls to strengthen the nation-state.

Concerns grew about income inequality, poor productivity and rural areas of advanced economies left-behind by economic and social changes.

By the end of the year, commentators as well as politicians were invoking nationalism, patriotism and a bigger role for democratic governments as part of a broad backlash against unaccountable multilateralism.

TECH DEMONS

Technology became something to be feared for its negative impact on existing industries rather than a positive force for productivity and social and economic change.

Journalists and politicians focused on the disruptive effect of internet platforms, social media, data collection and artificial intelligence on incumbent businesses and workers, now also including white-collar professionals.

Social media was blamed for intensifying political polarisation and spreading propaganda rather than hailed as an agent for reform and democratisation, with growing calls for government regulation of various platforms.

China’s leading technology exporters ZTE and Huawei bore the brunt of a backlash as the worries about technology intersected concerns about the security of global supply chains.

Cyber-espionage, surveillance and hacking by Russia, China, Iran, North Korea, Saudi Arabia, Israel and the United States among others, along with private security companies and criminal organisations, added to the jittery mood.

GEOPOLITICS

The Middle East became less rather than more stable in 2018, with an intensifying dispute between Saudi Arabia and Iran, tensions between Qatar and its neighbours, and the ongoing war in Yemen.

The U.S. withdrew from the Iran nuclear deal and re-imposed sweeping sanctions on the country, ratcheting up tensions and leaving the future of the accord unclear.

Previous optimism about Saudi Arabia’s modernisation programme was quashed by concerns about the country’s leadership following the detention of domestic critics and the killing of journalist Jamal Khashoggi.

In Europe, inconclusive Brexit negotiations dominated the political outlook, along with violent protests in France and the ebbing political authority of Germany’s long-time leader Angela Merkel.

Italy elected an avowedly populist government determined to confront the EU while there were concerns about judicial independence, press freedom and authoritarianism in parts of eastern Europe.

Voters continued to desert moderate centre-right and centre-left politicians to back parties and movements with more radical agendas, leading to fears about the EU’s future direction, stability and cohesion.

Meanwhile, the United States and its European allies continued to complain about Russia’s military intervention in Syria and Ukraine, along with its missile programmes and cyber activities.

MARKETS TUMBLE

Given the unpredictable environment, and the prospect of rising interest rates, it should come as no surprise that major equity markets and commodity prices fell sharply towards the end of the year.

The U.S. S&P 500 equity index posted its worst 12-month performance since February 2016, and before that Sept 2009, ending last year 6 percent lower.

South Korea’s KOSPI-100 index, which is heavily exposed to world trade, ended down 20 percent in its worst 12-month performance since May 2009.

Despite the worries, world trade has held up reasonably well so far, with volumes up 3.7 percent in the three months from August to October compared with the same period a year earlier.

Growth has moderated but is not yet showing the sharp slowdown anticipated by global equity markets. However, some forward-looking indicators paint a gloomier picture.

In Hong Kong, the world’s busiest air freight hub seen as a leading indicator for world trade, air freight volumes fell 0.2 percent in the September-November period compared with a year earlier, the worst 12-month performance since April 2016.

China’s economy also appears to have been slowing since the middle of 2018, squeezed by tighter credit, the tariffs imposed by the United States and an increasingly uncertain outlook for exporters.

The country’s manufacturers reported a significant decline in business activity in December, with the composite purchasing managers’ index falling to just 49.4, its lowest level since February 2016 and below the 50.0 threshold dividing economic expansion from contraction.

Mirroring the slide in global equity markets, Brent crude futures ended the year almost 20 percent lower, the worst 12-month performance since June 2016, and the calendar spread remains in a small but significant contango.

Most traders expect the oil market to remain modestly oversupplied in 2019, as worries about the impact of a slowing economy on consumption outweigh the impact of production cuts by OPEC and its allies.

John Kemp is a Reuters market analyst. The views expressed are his own.